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July 2016

07/28/2016

Incivility in society and in the workplace is on the rise. Virtually all people believe this is so. Every day we witness inconsiderate behavior, ‘in your face’ interaction in communications with others, and other forms of rudeness. There are many causes of incivility not the least of which is the explosion of social media as a way to communicate, including rants on Twitter. The anonymous nature of postings on the Internet feeds into such disrespectful behavior.

The lack of civility has now turned ugly with terrorist acts in churches, movie theaters, schools, in the workplace and on police officers. I believe this trend threatens the very fabric of society in the U.S. We may not need to wait for an attack by ISIS. We may need to worry about here at home first.

We have a society where mental health issues seem to be pronounced. Why is that? What is causing it? I believe it is due to the culture of greed in society and getting away from what has made this country great, which is caring about our neighbors and communities. We need to get back to being a civil society.

Civility represents the quality of our behavior with others in our communities. This is important for business because how we treat others signals who we are and what we value. Moreover, since the essence of ethics lies in how we are with others, civility and ethics are intricately linked.

Let us clear up some misconceptions. Civility is not peripheral to ethics, dealing merely with manners. True, civility does manifest itself in good manners, proper etiquette and politeness. But it also runs deeper and is more profound. Simply put, civility requires restraint, respect and responsibility in everyday life. Without these, we can never act ethically.

Ethics deals fundamentally with how we treat each other on a daily basis. Indeed, our small acts of civility and incivility constitute the heart of morality.

Civility cultivates a civic code of decency. It requires us to discipline our impulses for the sake of others. It demands we free ourselves from self-absorption. By putting ethics into practice in our day-to-day encounters, civility is that moral glue without which our society would come apart.”

Both inside and outside the workplace, we see a rash of disrespectful, discourteous and rude behavior. Angry commuters use their vehicles to take out their aggressions and deliberately cut others off in traffic. Customer service has diminished to the point where most would prefer to use the impersonal ATM machine than face an unhappy bank teller. Malicious political campaigns and tactics draw out the worst in even the most in candidates as we have learned all too well these past few months. Children face tremendous fear and stress from bullies at school.

The impact of such destructive behavior can be more psychologically damaging than open forms of abuse, such as harassment and violence. From a business and leadership perspective, the negative behavior happening outside of the workplace is trickling in — affecting employee loyalty, organizational commitment and overall productivity. The pressures of everyday life can take their toll on employees who are already working under a great deal of stress. Consequently, tempers get frayed and patience and tolerance are thrown out the window.

Encouraging civility in the workplace promotes a low stress work environment and improved employee morale. It also helps to mitigate employee dissatisfaction that often results in such things as civil rights complaints and lawsuits. The economic impact related to litigation, turnover, productivity and customer dissatisfaction can be devastating to an organization.

Civility is essential to defining the culture and establishing a foundation of proper business behavior. It is an underlying value that successful organizations strive to achieve. The link between civil behavior and virtue ethics is the answer—or at least a starting point to bring civility into one’s life, into the workplace, and in communications with others.

Virtue ethics deals with the character traits of individuals who act in a way that defines the type of person they are. Truthfulness, respect, consistent behavior in the way one person treats others, empathy, and trustworthiness are just some of the underlying ethical values that feed civil behavior.

To be able to build and maintain itself as a viable entity capable of reaching its full potential an organization must be able to manage its interpersonal relationships in a manner that promotes positive interactions that are civil and respectful. This is not an easy task considering the myriad personalities and individual circumstance that impact workplace interactions. But it can be accomplished with leadership commitment to fostering positive and meaningful interactions among employees.

Danita Johnson Hughes addresses this issue in her " Power Principles of Success." Dr. Hughes provides 3 basic principles to create a civil workplace as follows.

Respect is inherent in the belief that although another person’s beliefs may be different than yours, you should still honor their viewpoint and accord the other person due consideration. Taking someone’s feelings, ideas, and preferences into consideration indicates that you take them seriously and that their position has worth and value, even if contrary to your own. In so doing, you validate the other person’s individuality and right to a differing opinion.

Restraint is simply a matter of exercising personal self-control at all times. Therefore, you should know your triggers. Be aware of how your words and actions affect other people. Being aware of the things that make you angry or upset helps you to monitor and manage your reaction. Think before you act. Remember, you may not be able to control the things others say or do. But, you can control your response.

Refinement is the quest for continual cultivation and improvement of relationships in the workplace. Just as the process of Continual Quality Improvement has come to be known as a means to improve performance and increase efficiency in an organization, refinement of thought, ways of expressing those thoughts and the practice of continuously exercising appropriate decorum when relating to others can go a long way towards enhancing workplace civility. Improving and strengthening relationships requires effort and commitment.

Achieving civility in the workplace requires the involvement of every employee from the top down. Going to work in an environment free from the back-biting, rude employee behavior and the constant complaining that many are subjected to everyday is certainly not ideal. However, making the commitment to achieving and sustaining civility can be the key to a successful and thriving organization with high employee morale.

Ethical leaders should make workplace civility a priority in their business by insisting that all employees follow core values and exercise restraint when differences exist in the workplace.

The bottom line is ethics and civility are inextricably linked; you can’t have one without the other. This means ethics training in business must include discussions of civil behavior and ethical values.

Blog posted by Steven Mintz on July 28, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.

07/22/2016

Are there specific signs to look for of impending collapse of an organization? In her book The Seven Signs of Ethical Collapse,Marianne Jennings analyzes the indicators of possible ethical collapse in companies and provides advice how to avoid impending disaster.

Jennings starts with a description of ethical collapse, saying that it “occurs when any organization has drifted from the basic principles of right and wrong”, and she uses financial reporting standards and accounting rules as one area where this might occur. She points out that “not all companies that have drifted ethically have violated any laws”. Enron did not necessarily violate generally accepted accounting principles in treating the effects of some of its transactions with special-purpose entities off-balance-sheet. However, the company ignored conflicts of interest of Andy Fastow, the CFO, who managed some of the entities while wearing a second hat as CFO of Enron during the time the two entities had mutual dealings.

According to Jennings, “When an organization collapses ethically, it means that those in the organization have drifted into rationalizations and legalisms, and all for the purpose of getting the results they want and need at almost any cost.” A good example is Dennis Kozlowski at Tyco who misappropriated company resources for personal purposes without the approval of the board of directors and rationalized that he was just doing what those before him had done. Thus, he invoked one of the reasons and rationalizations for unethical behavior -- such an action is expected or standard practice in the organization.

Jennings links the rationalizations and legalisms to a culture that leads to behavior based on the notion “It’s not a question of should we do it”. It is a culture of “Can we do it legally?” This mentality occurs because of the combination of the seven factors working together to cloud judgment.

Jennings identifies seven common ethical signs of moral meltdowns in companies that have experienced ethical collapse. The common threads she found that make good people at companies do really dumb things include (1) pressure to maintain numbers; (2) fear and silence; (3) young ’uns and a bigger-than-life CEO (i.e., loyalty to the boss); (4) weak board of directors; (5) conflicts of interest overlooked or unaddressed; (6) innovation like no other company; and (7) goodness in some areas atones for evil in others.

In my studies of ethical failure, I have noticed four common failings in a variety of companies that suffered financial frauds. These are discussed below.

Pressure to Maintain the Numbers

It seems as though in many companies, tension exists between ethics and the bottom line. The first sign of a culture at risk for ethical collapse occurs when there is not just a focus on numbers and results, but an unreasonable and unrealistic obsession with meeting quantitative goals. This “financial results at all costs” approach was a common ethical problem at both Enron and WorldCom. At WorldCom, the mantra was that financial results had to improve in every quarter, and the shifting of operating expenses to capitalized costs was used to accomplish the goal regardless of the propriety of the accounting treatment. It was an “ends justifies means” culture that sanctioned wrongdoing in the name of earnings. Accountants like Betty Vinson got caught up in the culture and did not know how to be true to her values that such behavior was wrong.

Another example is Aaron Beam, the former CFO at HealthSouth, spent six months in jail because he couldn’t find a way to act on what he knew was the right thing to do and shut down the CEO of the company, Richard Scrushy, as soon as Scrushy started to demand accounting shenanigans to make the financial statements look better than they really were.

Fear of Reprisals

Fear and silence characterizes a culture where employees are reluctant to raise issues of ethical concern because they may be ignored, treated badly, transferred, or worse. It underlies the whistleblowing process in many organizations where ethical employees want to blow the whistle but fear reprisals, so they stay silent. One aspect of such a culture is a “kill the messenger syndrome”, whereby an employee brings bad news to higher-ups with the best intentions of having the organization correct the matter, but instead the messenger is treated as an outcast. Recent laws such as Sarbanes-Oxley and Dodd-Frank have built in long-needed-protections for whistle-blowers.

Loyalty to the Boss

Dennis Kozlowski, the dominant, larger-then-life CEO of Tyco, had an appetite for a lavish style of living. He surrounded himself with young people who were taken by his stature and would not question his actions. Kozlowski, who once spent $6,000 on a gold-laced shower curtain for an apartment paid for by the company, made sure these “young ’uns” received all the trappings of success so they would be reluctant to speak up when ethical and legal issues existed for fear of losing their expensive homes, boats, and cars and the prestige that comes along with financial success at a young age. They were selected by the CEO for their positions based on their inexperience, possible conflicts of interest, and unlikelihood to question the boss’s decisions.

Weak Board of Directors

A weak board of directors characterizes virtually all the companies with major accounting frauds in the early 2000s. At HealthSouth, Richard Scrushy surrounded himself with a weak board so that when he made decisions that contributed to an accounting scandal where the company’s earnings were falsely inflated by $1.4 billion, the board would go along, in part because of their interrelationships with Scrushy and HealthSouth that created conflicts of interest.

Ethical collapse is less likely to occur when top management acts on core values such as honesty, integrity, responsibility, and accountability. Ethical leadership is needed to ingrain such a culture into an organization. Absent the commitment to act in accordance with these values and lacking an ethical tone at the top, all too many companies lose their way and take the easy way out. Short-term decision making crowds out long-term ethical behavior and collapse may be just around the corner.

Blog posted by Steven Mintz on July 28, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.

07/21/2016

The Lost Art of Integrity in Business and Accounting

Doing the right thing and blowing the whistle do not always pay off and can be an arduous task. A case in point is what happened to Anthony Menendez in his whistle-blowing ordeal at Halliburton. One day in February 2006, Menendez received an email from Halliburton’s chief accounting officer, Mark McCollum that was addressed to much of the accounting department. It read: “The SEC has opened an inquiry into the allegations of Mr. Menendez.” Everyone was told to retain their documents until further notice. Menendez had been outed.

Tony Menendez served as the Director of Technical Accounting Research and Training at Halliburton. Menendez’s journey as a whistleblower began in May 2006 when he brought a claim under the Sarbanes-Oxley Act based on retaliation, but the Department of Labor would not take up his claim. He brought separate lawsuits, but lost. Starting in 2008, he decided to represent himself in the appeals process. It went on for three years. In September 2011, the administrative law appeals panel ruled that he had been retaliated against for blowing the whistle, just as he had argued all along. However, Halliburton appealed the decision and it took three additional years until November 2014 for Menendez to be fully vindicated when the appeals process ended in his favor.

The accounting matter at Halliburton was so basic that virtually all of my students recognized the deficiency right away. Halliburton contracts with energy companies to find and exploit huge oil and gas fields. It sells services of its geologists and engineers who work intricate machinery built by Halliburton and sold to its customers. The company’s accountants had been allowing the company to count the full value of the equipment right away as revenue, sometimes even before it had assembled the equipment. But the customers could walk away in the middle of the contracts. Menendez knew that if the equipment were damaged, Halliburton, not the customer, absorbed the loss.

Menendez recommended the company wait until the work was completed to record the equipment sales as revenue. Even though top Halliburton accounting executives, including the chief accounting officer, Mark McCollum, agreed with Menendez’s analysis, they didn’t act to correct the accounting because of concern about its impact in slowing revenue growth.

Unbeknownst to Menendez, his complaint went to the Halliburton legal department as well as the board committee, an apparent violation of company policy. The audit committee was supposed to keep such reports confidential. A few days later, the SEC notified the company that it had opened an investigation into the company’s revenue recognition. Then, the email from McCollum got distributed. Halliburton’s general counsel said “the SEC is investigating Mr. Menendez’s complaints” to the company’s chief financial officer, KPMG, other top executives and McCollum. McCollum had forwarded it to at least 15 of Menendez’s colleagues in accounting. As far as Halliburton was concerned, they had a traitor in their ranks.

During his nine-year long ordeal, Mr. Menendez fought off the efforts of a mega company to silence him. Halliburton threw everything but the kitchen sink at him through legal maneuverings. Menendez stood strong. He exhibited the strength of character that led to his being chosen for the Sentinel Award given out by the Association of Certified Fraud Examiners.

What makes one person do the right thing while another might cave into the pressure to act otherwise? The answer is “integrity.” Integrity is the whole of a person’s character. Integrity means to be a principled person, act with courage when ethical dilemmas arise, and be strong-willed in following through ethical intent with ethical action.

In my research into ethical behavior I have found common elements of people who act with integrity. They include: religious and/or educational background in ethics; role models who “walk the talk” of ethics; persistence: not giving up until the “right” outcome has been achieved; and a supportive environment. Of course, Menendez did not have that supportive environment – at least in the workplace – but he did on the home front.

There aren’t enough Tony Menendez stories. One that does come to mind is Cynthia Cooper, the former director of internal auditing at WorldCom who is credited with blowing the whistle on the $11 billion accounting fraud. We, as educators, need to focus more attention on our heroes to counterbalance the unfortunate emphasis of the press on the bad actors.

Blog posted by Steven Mintz on July 21, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.

07/14/2016

Are you thinking about becoming a whistle-blower under a federal law such as the Dodd-Frank Financial Reform Act or the Commodity Futures Trading Commission (CFTC)? You best first understand that any amount you receive is treated as ordinary taxable income by the IRS. Even the amount you pay as a contingent fee to an attorney is taxable. You can only get a deduction for that amount as a miscellaneous itemized deduction subject to the 2% floor.

Let’s assume that a whistle-blower receives a $600,000 award from the SEC pursuant to the Dodd-Frank Act and pays $150,000 as the contingent fee. The whistle-blower is taxed on the full $600,000. Assuming a 30 percent combined federal and state tax rate, the whistle-blower pays $180,000 in taxes and nets $270,000 [($600,000- ($150,000 + $180,000)], or 45 percent of the award.

Notwithstanding the exception described below, my biggest complaint is that the portion of the award that is paid out as a contingent fee is taxed twice: once to the awardee and once to the attorney receiving the fee. I’ve never been a fan of double-taxation, and this is a good example of the unfairness of that practice.

Attorney's fees can be deducted above the line to determine adjusted gross income only if the award is the result of a retaliation case, not a Dodd-Frank whistle-blower action. In these cases, the recipient only pays tax on the amount received net of attorney’s fees.

Also, a whistleblower under the Federal False Claims Act only pays taxes on the net recovery. The same is true for a whistleblower who receives an award from the IRS.

However, since no statutory exclusion applies to the attorney’s fees paid by a whistleblower who obtains an award from the SEC or CFTC under Dodd-Frank, he or she must go the itemized deduction route, which means the 2% floor and the 28% alternative minimum tax (AMT).

The classic case of taxability is Patrick v. IRS, 16387-12, U.S. Tax Court (Washington). In this case the court ruled that the whistleblower’s $6.8 million award must be taxed as ordinary income, rejecting arguments that the money should be recognized as capital gains and subject to a lower rate. Craig Patrick, a former reimbursement manager for California medical device-maker Kyphon Inc., helped win the recovery of tens of millions of dollars for the U.S. from an alleged Medicare fraud and his efforts “are to be applauded and were rewarded,” Judge Diane Kroupa wrote in her ruling. “Rewards, however, are treated as ordinary income” and “subject to tax as such.”

Patrick blew the whistle on allegedly fraudulent marketing. He argued that the transaction was akin to the sale of a trade secret. Kroupa ruled that under the False Claims Act, the government doesn’t purchase information. Instead “it permits the person to advance a claim on behalf of the government. The award is a reward for doing so. No contractual right exists.” Kroupa also rebuffed the Patricks’ argument that the information and documents Craig Patrick gave the government were his property and thus capital assets.

Patrick claimed in his whistleblower suit that Kyphon engaged in a years-long scheme to inflate Medicare bills by persuading hospitals to bill for a spinal procedure at inpatient rates rather than for less costly outpatient treatment.

The alleged fraud involved kyphoplasty, a treatment for compression fractures in which spinal gaps were filled with bone cement. Medtronic Inc. which acquired Kyphon in 2007, agreed to pay $75 million to settle the case in May 2008.

From an ethical perspective, I do not agree with the distinctions being made by the court with respect to the government purchasing information versus allowing the whistleblower to advance a claim on behalf of the government. Yes, a contractual right may not exist but how does it exist when retaliation is present? The rules seem to be applied indiscriminately.

On the other hand, it could be argued from a justice perspective that retaliation is a fair basis for differential treatment. Justice Theory holds that equals should be treated equally, while unequals should be treated unequally. Using that argument, those who have endured retaliation have been more harmed than whistleblowers who have not been retaliated against. However, the logic of this argument seems to imply it is better for the would-be whistleblower to wait to be retaliated against before blowing the whistle. It could save that party thousands in tax payments otherwise due to the IRS. However, it also exacerbates the negative effects on the investing public.

Clearly there are inconsistencies in the taxability of awards especially when we look at environmental whistleblowers. While many environmental whistleblowers report law-breaking simply because they believe it’s the right thing to do, financial incentives provide additional motivation for blowing the whistle.

Unfortunately, environmental whistleblower law is piecemeal, with inconsistent incentives and protections. While most laws have anti-retaliation provisions, many do not provide financial awards. In addition, cozy relationships between some enforcement agencies and industries can undermine whistleblowers’ efforts to ensure environmental regulation compliance.

There should be a full and transparent discussion about whistleblowing and the societal interest. The ultimate objective is to protect the public interest. The ethical question is whether whistleblowing is the best way to achieve that result. Assuming the answer is affirmative, then from an ethical perspective the entire issue should be examined including whether any distinctions should be made with regard to taxability. After all, it may be that awarding ethical action obscures the real purpose of the act of whistleblowing, which is to right a wrong.

Blog posted by Steven Mintz on July 14, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.

07/07/2016

When we think about workplace ethics, the first thing that comes to mind is a code of conduct that influences the development of an ethical culture in the workplace. A code goes beyond what is legal for an organization and provides normative guidelines for ethical conduct. Support for ethical behavior from top management is a critical component of fostering an ethical climate.

Employees who sense that top managers act unethically quickly lose trust in those managers. The result can be to become disillusioned with the goals of the organization and question whether the corporate culture is one that is consistent with individual, personal values and beliefs. When the values and beliefs of an individual do not match those of the organization, ethical dissonance occurs and these differences need to be resolved to bring an ethical balance back to the organization.

Establishing an Ethical Culture

An ethical organization is one in which top managers establish a tone at the top that promotes ethical behavior including to raise questions when questionable behavior occurs. Here is a list of measures that should be taken to establish an ethical culture.

Establish clear policies on ethical conduct including a code of ethics.

Develop an ethics training program that instills a commitment to act ethically and explains code provisions.

Establish an ethics hot line where employees can discuss questionable behavior on an anonymous basis.

Have employees sign a statement that they have complied with ethics policies.

Enforce ethics policies fairly and take immediate action against those who violate the policies.

Reward ethical behavior by including it in the performance evaluation system.

Character and Leadership in the Workplace

“Character Counts” is the mantra of the Josephson Institute of Ethics. Characteristics of ethical behavior in leaders include: compassion, courage, diligence, fairness, honesty, inclusiveness, initiative, integrity, optimism, respect, responsibility, and trustworthiness. Good leaders have strong character and have a moral imperative underwrite their actions. Management guru, Warren Bennis, is quoted as saying: “Managers are people who do things right and leaders are people who do the right thing.”

Good character can be developed through experience and learning. Each situation we encounter presents a different experience and opportunity to learn and deepen character. Character becomes critical when managing a crisis, such as an ethical dilemma where stakeholder interests conflict.

Managers can set the right tone at the top and foster ethical leadership, both of which are necessary for ethical decision making, by following four simple rules.

Consider how your actions affect others. How will the stakeholders be affected by your intended actions? Here, a utilitarian analysis can be used to evaluate costs and benefits of alternative actions.

Do no harm. Your actions and decisions should not harm others. One exception is whistleblowing because of the need to emphasize “the greater good,” which means the public interest.

Make decisions that are universal. Consistent with the categorical imperative of Rights Theory, an ethical leader should ask: How would I want others to resolve the conflict that I am dealing with? Universal decisions are those that should be followed across the board.

Reflect before deciding. As a final step, think about how you would feel if your actions and decisions appear on the front pages of the local newspaper. Would you be proud to defend them and comfortable explaining them?

Integrity: The Basis for Trust in the Workplace

Albert Camus, the French Nobel Prize winning author, journalist, and philosopher, said: “Integrity has no need of rules.” People of integrity are self-driven to do the right thing. Leaders of integrity act on the knowledge that their actions are ethical and provide the basis for others in the workplace to follow their lead.

KPMG's Integrity Survey 2013 provides an inside look at organizational misconduct based upon responses from more than 3,500 U.S. working adults. Key findings from the report include:

Nearly three out of four employees reported that they had observed misconduct within their organizations in the previous 12 months.

More than half of employees reported that what they observed could potentially cause a significant loss of public trust if discovered.

Some of the driving forces behind fraud and misconduct in the corporate environment include pressure to do “whatever it takes” to meet targets, not taking the code of conduct seriously, believing employees will be rewarded based upon results and not the means used to achieve them, and fear of losing one's job for not meeting performance targets.

Nearly half of employees were uncertain that they would be protected from retaliation if they reported concerns to management. And more than half suggested a lack of confidence that they would be satisfied with the outcome.

Ethics and compliance programs continue to have a favorable impact on employee perceptions and behaviors.

Employees were asked what they would do if they observed a violation of their organization's standards of conduct. The results were: 78 percent would notify their supervisor or another manager; 54 percent would try resolving the matter directly; 53 percent would call the ethics or compliance hotline; 26 percent would notify someone outside the organization; and 23 percent would look the other way or do nothing.

It's encouraging to learn that over three-fourths would inform their supervisor, in part because it is the generally recognized first step in considering whether to blow the whistle. It is somewhat troubling that almost one quarter of the workers would look the other way or do nothing.

Tone at the Top

The tone at the top set by top management is a determining factor in creating organizational commitment to high ethics and integrity. Employees were asked whether the chief executive officer and other senior executives exhibited characteristics attributable to personal integrity and ethical leadership. Approximately two-thirds of the employees agreed that their leaders set the right tone regarding the importance of ethics and integrity and served as positive role models for their organization, leaving one-third unsure or in disagreement.

Perhaps not surprisingly, a large percentage (64 percent) indicated that the root cause of misconduct was pressure to do “whatever it takes” to meet business objectives while 59 percent said they believed they would be rewarded for results, not the means used to achieve them. In such instances, the corporate culture does not foster integrity or ethical behavior; instead, expedience and self-interest drive workplace behavior.

Character-based leadership needs to be emphasized in business if companies are to meet their ethical obligations to those who rely on organizations for their livelihood and who are benefited or harmed by organizational decision-making. The notion of a corporate social responsibility needs to be linked with character-based leadership informed by a strong set of unyielding ethical values.

Blog posted by Steven Mintz on July 7, 2016. Dr. Mintz is Emeritus Professor from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.